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Deposit Accounts Two ways to perfect in money in a bank account: Perfection by CONTROL directly against the bank account as original collateral. [9-314] Perfection in OTHER COLLATERAL that is then sold for PROCEEDS deposited in the account. [9-315]

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Perfection by Control of Deposit Accounts Perfection by Control Accomplished in three ways:  BE the depository bank. [9-104(a)(1)];  AGREE with the three parties (SP, Debtor, and Dep. Bank) that the bank will let SP control the account. [9-104(a)(2)];  BECOME the account owner (SP becomes the bank’s customer. [9-104(a)(3)]

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Priorities in Deposit Accounts Perfection by Control > Perfection by other means (proceeds); [9-327(1)] Control by Bank > Control by agreement and Proceeds. [9-327(3)] Control by Ownership or subordination agreement > Control by Bank. [9-327 (4) and 9-339]

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Advanced Priority in Deposit Accounts Control > Control in order of TIME. [9-327(2)] Proceeds > Proceeds in order of priorities in original security interest.

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Moving Money in Deposit Accounts  What to do about money that LEAVES the bank account (can you go get it back?)  What to do about money that STAYS and is COMMINGLED in the bank account (whose money is whose?)

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Part I: Transfers Out of Bank Accounts Money (proceeds OR original collateral) that is transferred to someone else out of a bank account is free and clear once it is transferred. [9-332] Example: I sell inventory, deposit proceeds in a bank account. I then write a check on the bank account to pay for groceries. The grocery store is free and clear. Collusion standard: If the transferee COLLUDES with the debtor to transfer the money, the court can undo the payment. [9- 332(a), (b)]

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Part II: Commingling and Tracing What about money that stays in the bank account? The problem: money that is proceeds of sales of collateral gets mixed with non-proceeds money in the same account. USUAL case: merchant mixes proceeds from sales of inventory in with everything else in his general operating account.

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Commingling (con’t) Commingling isn’t a problem if the SP has a DIRECT interest, secured by control, in the bank account. Then, all the money that comes into that account is collateral. Commingling IS a problem for proceeds of sales of collateral.

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Tracing Most common tracing rule is Lowest Intermediate Balance. (non-Code law). [9-315(b)(2)] This is a rule of logic: if the account balance drops below the amount of proceeds deposited, then that amount of proceeds logically MUST have been dissipated.

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Practical LIB Step 1: When account balance dips below proceeds amount, that is the new LIB; Step 2: Add all new deposits of proceeds that come after the LIB above (i.e., LIB + new proceeds deposits is your new total); Step 3: If the account balance dips again below the new total in Step 2, that’s the new LIB. Go back to step 1.

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So What do Sophisticated Parties Do? Perfect in pledgeable collateral (chattel paper, notes) by possession, to prevent sales to third parties; Create lock-box accounts that limit the debtor’s ability to commingle and transfer proceeds.